Live/Work/Walk: Removing Obstacles to Investment

American land use changed rapidly in the 20th century, from streetcar suburbs to gated communities, supplanting the traditional mixed-use residential-commercial districts that were the norm in the pre-World War II era. Before the growth of federal housing initiatives in the 1930s and the creation of FHA in 1934, traditional streets composed of a mix of commercial and housing - i.e., Main Streets - were common partly because lenders appreciated that risk was spread over different types of real estate. For example, a flower shop with an apartment above provided two sources of income. One might perform well when the other was not. But now lenders look at traditional districts as adding risk - "one use or the other could fail so better not to allow it at all." As a largely unintended result, the signal to investors and developers is if you want financing, avoid residential-commercial districts and stick to single-use.

Despite this regulatory stance, in recent years the desire for traditional districts has steadily gained popularity. Demographic and consumer preference changes over the last decade have created greater demand for walkable, urban real estate in communities complete with mixed residential and commercial uses. New development has not served this demand partly because of federal policies and practices that discourage such settlement. Specifically FHA, Fannie Mae, Freddie Mac, and HUD's 221d4 and 220 programs all cap the commercial component at a small percentage of the gross floor area/net rentable space or gross income derived of a given project. Combined with the tendency of private lenders to follow or apply even more restrictive policies than the federal underwriting rules, almost all of America's pre-World War II Main Streets, as well as newer forms such as live/work units, are excluded from the secondary mortgage markets and HUD's capital program for rental housing.

  Cap on Gross Income Derived Cap on Gross Floor Area / Net Rentable Space
HUD 221(d)4
HUD 220
Fannie Mae
Freddie Mac

Studies done by University of Utah professor Arthur C. Nelson, such as "The Next One Hundred Million," have estimated that the current supply of unattached single-family housing already exceeds projected demand and will continue to do so until 2037. Further analysis by Nelson (see “Reshaping America’s Built Environment”) indicates that as the glut of large-lot homes continues to flood the market, the now clearly evident new demand for smaller housing in walkable, traditional neighborhood settings will increase substantially and consistently. A recent Brookings Institution study - "Walk this Way:The Economic Promise of Walkable Places in Metropolitan Washington, D.C." by Chris Leinberger and Mariela Alfonzo - highlights the economic appeal of amenity-rich, walkable, convenient communities, noting "each step up the walkability ladder adds $9 per square foot to annual office rents, $7 per square foot to retail rents, more than $300 per month to apartment rents and nearly $82 per square foot to home values." (See "Now Coveted - A Walkable, Convenient Place" - New York Times, May 25, 2012.) Given stronger appeal evidenced by higher rents, walkable, mixed-use urban does not appear riskier than single use developments. Arguably, programs that do not foster mixed-use might be considered riskier.

More recently, Arizona State professor Gary Pivo released a report showing that the assumed riskiness of walkable, urban development is misplaced. The report, The Effect of Sustainability Features on Mortgage Default in Multifamily Housing, finds that properties in less auto‐dependent residential locations where 30% or more of the workers living in the area commute to work by subway or elevated train, were 58% less likely to default on their mortgages.

Current federal housing finance regulations need to be updated to reflect today's market conditions. The demand for housing types has changed markedly, and government policies should heed market demand to allow for mixed commercial-residential development and act as a catalyst for economic growth and urban revitalization. Better matching the percent limitations on non-residential space with current demand would spur new and diverse development, promoting further recovery of the housing market. Meeting the demand for walkable, urban communities would also expand the provision of housing options for lower income people, deliver environmental and public health benefits, and provide increased livability in urban settings throughout the nation.

Glenwood Park, Atlanta, GA

Since 2010, through its Live/Work/Walk: Removing Obstacles to Investment initiative, CNU and its allies have been advocating for FHA, Fannie Mae and Freddie Mac to revise the regulations on the amount of commercial space allowed in mixed commercial-residential areas. On September 13th, 2012, in HUD Mortgagee Letter: 2012-18, and extended on August 29, 2014 in HUD Mortgagee Letter 2014-17, FHA revised rules that limited the cap of commercial space in mixed-use condo buildings from 25% to an updated 35% commercial use, with possible waivers for developments with up to 50% commercial space.

The recent FHA change not only represents a victory for CNU and its allies, but for the places that are increasingly where people want to live: connected, compact communities that deliver public health, environmental and economic benefits. As Christopher Leinberger has written, "Housing is such a large part of the economy that a sustained, robust recovery is difficult to imagine without a corresponding recovery in the building, buying, and selling of houses." Working with a growing coalition including the Center for Neighborhood Technology (CNT), LOCUS/Smart Growth America the National Association of Home Builders (NAHB), the National Association of Realtors, the National Town Builders Association (NTBA), Regional Plan Association (RPA), R Street, and the Urban Land Institute (ULI), CNU holds high hopes that FHA, Fannie Mae, Freddie Mac, and HUD's 221d4 and 220 programs will soon follow the recent FHA action on commercial space caps in condominiums, and raise and/or eliminate the restrictive covenants on commercial space in traditional neighborhood districts. By recognizing the latent demand hindered by the current restrictions in place, there is a valuable opportunity to support the smart growth policies of the HUD/USDOT/EPA Partnership for Sustainable Communities, jumpstart much-needed economic growth while pursuing environmental and social equity goals, and serve the basic goals of federal housing policy.

Click here for CNU's Live/Work/Walk Resources page for recent news, articles, charts, studies and more.



Allied Organizations:

Center for Neighborhood Technology (CNT)
National Association of Home Builders (NAHB)
National Association of Realtors
National Town Builders Association (NTBA)
R Street
Regional Plan Association
Urban Land Institute (ULI)

Initiative Leaders:

  • Scott Bernstein, Center for Neighborhood Technology, CNU Board Member
  • Lynn Richards, CNU CEO & President
  • Chris Leinberger, LOCUS/Smart Growth America
  • David Green, Perkins + Will
  • Laura Heery, Brookwood Group, CNU Board Member
  • Steve Maun, Leyland Alliance, CNU Board Member
  • Dean Schwanke, ULI
  • Sam Sherman, Sam Sherman Associates LLC
  • Tom Wright, RPA

  • CNU Initiative Partner:

    A Call to Action, August 2013 report from Smart Growth America and LOCUS